Don't rely heavily on substitution, PSCs told

Many public sector PSCs are getting an ‘outside’ result from the IR35 digital tool by passing the substitution test even though -- in reality -- they cannot send a substitute, an adviser says.

Typically, the worker is provided via an intermediary which believes it can find and pay a simple “stand-in,” so someone who’s merely “a replacement,” wrote John Chaplin of EY.

“[Therefore] you haven’t got a substitution,” he said. “My advice to anyone in the contractual chain is to be very careful about placing too much reliance on the substitution test.”

Usually question five in the IR35 digital tool (initially known as the ESS but later renamed CEST), the substitution test has been privately described by an official at HMRC as suffering from “issues”.  

Mangers on the NHS, who were briefed by the official, say HMRC has had more feedback on the substitution question than any other which the tool poses. It is “throwing out results incorrectly,” they were told.

So “be prepared for [a] challenge if you rely on substitution,” Mr Chaplin advises now, in an online post, addressing HMRC's IR35 tool users in receipt of an ‘inside’ result having passed question five. 

“Not only does it need to be legally possible (in the contracts up and down the chain) but it needs to be a true replacement (found, paid for and administered by the contractor).”

He also said that substitution does not need to occur for it to be “possible,” but it must be “a realistic possibility,” so “not just built into contracts as a workaround” to the IR35 changes.  

“I’m seeing lots of contractors pass the IR35 test due to the substitution test when they can’t, in reality, provide substitutes.”

The adviser added: “Run the test first as though substitution were not possible. At least that way, you will have the answers based on control, financial risk etc. to fall back on.”

Another adviser, status firm Qdos, has implied the substitution question is harsh, for stipulating that the client must not have interviewed the substitute before they began working.

The firm also takes issue with HMRC’s criteria for a ‘yes’ answer -- reproduced below -- inferring that substitution is only valid if the PSC is “unwilling,” not “unable” to do the work.

  • Was equally skilled, qualified, security cleared and able to perform the worker's duties
  • Wasn't interviewed by the end client before they started (except for any verification checks)
  • Wasn't regularly engaged by the end client
  • Did all of the worker's tasks for that period of time
  • Was substituted because the worker was unwilling but not unable to do the work

This inference contradicts the ruling in Express & Echo Publications Ltd. But the tool is even more clearly at odds with another case -- Ready Mixed Concrete, where a total absence of substitution was trumped by a lack of control to determine that IR35 did not apply.

Editor’s Note: Related –

Contractors’ Questions: How to set an IR35-friendly substitution clause?

Creasy case confirms the value in an unfettered right to substitute

The right of substitution and IR35

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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